Most investors are looking at Africa as the next frontier for their money. But the continent has to deal with paradoxes such as unemployment and inequality and the billions of dollars disappearing into tax havens.

The Economic Commission for Africa executive secretary, Carlos Lopes, spoke to Mwaura Kimani about Africa’s growth path.

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The latest data by the Economic Commission for Africa shows that the continent’s economies are growing but inequality is growing too. The growth is not reaching the people. What is the problem?

Poverty indicators have improved. We have 10 per cent fewer people who are poor in Africa now than a decade ago. But we still have a large population who are poor.

Africa’s growth has mainly been propelled by three main factors.

First, there is the commodity boom, with commodities providing the biggest share of exports. Second, the macroeconomic environment has greatly improved and third, internal consumption has been driving growth in some areas like the service industry. This is not really the type of growth that will create jobs.

What is the best intervention to reverse this problem?

The way out of this is industrialisation. It has always been associated with modernisation of countries and higher standards of living. But the reality remains that instead of progressing we are regressing in terms of manufacturing and value addition.

African countries are holding foreign reserves totalling over $500 billion in developed economies. Has this denied the continent’s economies the funds to seal financing deficits, especially in building infrastructure?

While foreign reserves are held as a protection for the balance of payments (BoP) by providing buffers to foreign currency, there is a paradox.

We have three problems relating to reserves held by African central banks outside the continent. First is the definition of reserves: What constitutes reserves is an issue that is left to the International Monetary Fund to decide.

A country cannot proclaim on its own that these are its reserves if they are in financial papers. They have to be developed country government debt or deposits in international banks. This is important because of the debt risk rating you are given.

A lot of African countries are not at that stage of getting a rating because they are considered below the radar in terms of investment destinations. This is important for the healthy check of your economy to show that you are sustainable, resilient and you can absorb shocks.

But others argue that there is no mystery why central banks invest their forex abroad as these funds are held as buffers. There is so much money stuck in this kind of arrangement that Africa cannot put into development financing. But the prudent fiscal policies that have been achieved through this management should continue.

READ: Africa’s $200 billion kept in foreign banks

This is not a push for spending without controls or going to debt-prone activities that will hurt economies. But it is a call for us to look for an arrangement that will change the equation for African countries. The African Development Bank (AfDB) and its Africa50Fund are attempting to change this.

The other problem is that we are yet to find ways of making use of reserves to fund the transformation of the continent. We have made it clear that there are huge reserves sitting in the Bank of France for Francophone countries, but they are not being used for development.

New data released by the African Union and ECA shows that Africa is losing at least $60 billion through illicit outflows and that the number is rising. Why is this still happening when governments and tax authorities are tightening measures to catch tax cheats?

The flows are over 10 times the annual global aid flow. Mispricing constitutes the biggest share of illicit outflows. In the past three months, Guinea Conakry has questioned some contracts with corporations, Chad did the same on some two contracts while Gabon has requested a re-negotiation of a royalties management system.

Mozambique reviewed a contract with one of the gas exploration firms. So governments across Africa are moving to gain more control of contracts. We are likely to see more of these in the coming years.

Who are the masterminds of these illicit outflows?

Multinationals, especially in transfer pricing. Also, when you look at all these contracts and transactions, there are intermediaries involved, which makes it hard to nail the real culprits.

There is the extreme case of Zambia, whose main trading partner is Switzerland, despite the fact that Zambia does not export a kilo of anything to Switzerland. It is the intermediaries who appear in the accounts, and the product ends up in China.

READ: AU in new push to clamp down on firms linked to $60bn illicit outflows 

What is the role of foreign banks in this, and how can Africa handle the issue of transfer pricing?

It’s clear there are banks that specialise in covering up these big transactions. Some of these are under investigation by the Organisation for Economic Co-operation and Development (OECD).

In Africa, when you look at transfer pricing, there is a lack of technical competence to deal with it. Governments are unable to tell how much is being extracted, for example, and when companies are cheating at this.

We don’t have the capacity to physically check so that when you say it is one tonne, we confirm it is, or what the value is for the tonne. Partly, it’s an issue of better negotiations. There is an initiative, the African Minerals Development Centre, jointly sponsored by the African Union, ECA, the AfDB and UNDP to boost negotiations.

African companies are increasingly investing outside the continent. Why?

Most corporations are sending huge monies abroad, due to the risk perception on the continent. I would mention Sonatrach, the Algerian state energy company, because it is the biggest corporation on the continent and they are making huge energy investments in Europe.

However, you also have the opposite in the form of risk takers who are prepared to go the extra mile to compete favourably. Here, we have corporations like Standard Bank in South Africa, who are re-investing in Africa.

African banks continue to enjoy wide interest rate spreads, threatening growth by making borrowing costly. Why?

Banks on different continents enjoy huge interest rate spreads. So this is not an African problem. It’s through policy and regulation that you get there. There are successful cases like in Brazil, where this issue has been addressed through state development banks that are strong enough to drive the market to particular interest rates.

There is no miracle recipe for this, because banks will always say they have higher risks than their state-run counterparts. The only other way is to have banks work with insurance companies on insurance-related products.

The United States Federal Reserve in December last year said it would taper monthly purchases of government and mortgage bonds from $85 billion a month to $75 billion. How will this process affect African economies?

It creates volatility in the currencies of emerging markets and hence a contagion in terms of perceptions. The emerging and frontier markets will have a bumpy ride as a result of this. One of the biggest investors on the continent is South Africa and this affects the rand negatively, which will not only affect South African banks but also Africa as a whole.

African countries like Kenya, Uganda and Tanzania are planning to float sovereign bonds in the near future. Do you think the market is ready for it in light of the tapering off of quantitative easing in the US?

Eight countries in Africa have already floated bonds. Right now, those planning to do so, I think, should wait for a while because of the volatility of other markets provoked by the tapering off of quantitative easing in the US. I don’t think now is the moment but it will be soon. The macroeconomic environments in Africa are positive.

Some countries have been engulfed by conflicts. How will these wars affect growth?

Conflicts always project a bad image and bad branding. But the conflicts in South Sudan, Mali and Guinea-Bissau have not affected growth yet.